Unpublished Disposition, 885 F.2d 875 (9th Cir. 1985)

MEMORANDUM^* 

Plaintiff-appellee, Transportation Factoring, Inc. (TFI), an assignee of accounts receivable, sued to collect the accounts. The sole issue on appeal is the debtor's (Pac-Paper, Inc., defendant-appellant) right to set off debts owed it by the assignor's predecessor. We reverse and remand.

* Victor Clarke worked for Pac-Paper, Inc. (Pac-Paper) until February of 1985, when he purchased its trucking division. He operated it as a sole proprietorship until March of 1985 when he incorporated the business as Clarke Transportation, Inc. (CTI).

On June 25, 1985, CTI entered into an agreement to assign its accounts receivable (including Pac-Paper's accounts incurred for shipping services) to TFI. The assignment agreement contained a choice-of-law provision specifying that the agreement is "subject to the laws of the State of Oregon."

TFI then sued Pac-Paper for collection of the assigned accounts. The district court held that Pac-Paper was entitled to offset $3,809.25 of TFI's claims, but denied Pac-Paper a number of other offsets totalling $129,664.54. On appeal, Pac-Paper challenges only the district court's denial of two offsets totalling $68,697.36.

These two offsets represent Pac-Paper's claims against Victor Clarke, incurred by him as an individual before he incorporated the business. The district court held that Oregon law governed and that, under Oregon law, CTI was not responsible for Clarke's individual business debts because "Pac has not proven any improper conduct on the part of Victor Clarke, individually, relating to his position as the controlling shareholder" of CTI. Pac-Paper's claims against Clarke relate to Clarke's purchase and operation of his trucking business. Pac-Paper argues, however, that CTI is a "mere continuation" of the unincorporated trucking business Clarke operated and that CTI is therefore responsible for the business debts Clarke incurred before he incorporated CTI.¹ 

II

Pac-Paper argued to the district court that Washington law governs the issue of CTI's responsibility for Clarke's individual business debts. The district court, however, held that because the assignment agreement between TFI and CTI specified that Oregon law controlled all disputes arising out of the assignment agreement, Oregon law should apply. The district court erred. It is hornbook law in every jurisdiction that an assignment merely places the assignee (TFI) in the assignor's (CTI's) shoes. Thus, if a suit by Pac-Paper against the assignor CTI for payment of Clarke's individual business debts would have been governed by Washington law, then the district court should have evaluated Pac-Paper's offset claim against the assignee TFI under Washington law. As Pac-Paper convincingly argues, " [i]f Pac-Paper sued Clarke or CTI on the debts Pac-Paper now claims as offsets, there is no question that Washington law would govern that dispute" because " [b]oth Pac-Paper and CTI are Washington corporations. All contracts between Pac-Paper and Victor Clarke were entered into in Washington and anticipated performance in Washington. The Purchase and Sale Agreement between Clarke and Pac-Paper contained a choice of law clause, designating Washington law...." The district court should have applied Washington law.

B. CTI is responsible for Clarke's Individual Business Debts under Washington Law

In Zander v. Larsen, 250 P.2d 531, 535 (Wash.1952), the Washington Supreme Court held that a corporate successor to a partnership was responsible for the partnership's debts. The court concluded that the corporation "was nothing more than a continuance of the partnership" because

[t]he partners composing the partnership and the incorporators and stockholders of the corporation were the same persons.... The three partners subscribed to all of the capital stock of the corporation. All of the assets the corporation had with which to start business were those turned over to it by the partnership.... It paid no money for the partnership assets. The corporate stock received did not become a partnership asset. It carried on the same business in Tacoma and ... continued to be the same entity under substantially the same name.

Id. at 535. See also Mayrand v. Packaged Homes Mfg., 350 P.2d 862, 864 (Wash.1960) (In Zander, "the corporation was merely a continuation of the partnership and was therefore bound to pay its debts. The partners, by incorporating, had simply 'put on another coat.' "); 8 Fletcher Cyclopedia of Corporations Sec. 4014, at 353 (1982) (rev. ed. 1982) ("So a corporation formed by and consisting of the members of a partnership, which takes a conveyance or assignment of all the assets of the partnership for the purpose of continuing the business, is presumed to have assumed the partnership debts and is prima facie liable therefor.").

TFI argues that Zander is inapposite because it deals with the responsibility of a successor corporation for the debts of a predecessor partnership, rather than the responsibility of a successor corporation for the debts of a predecessor business owned and run by a single individual. In Mayrand, however, the Washington Supreme Court recognized that a corporation which is a continuation of a single individual's business is liable for that individual's business debts.

The Zander case is not here apposite. Mrs. Mayrand contracted with [individual building contractor] Schultz only. The corporation was formed by Schultz and Perry.... Perry contributed $4,100 in cash and $900 in services to the corporation.... Under these facts, the corporation was not a continuation of the Schultz business, but was a new entity. The new entity could assume any part of the former Schultz business it believed to be profitable.

350 P.2d at 864.

Other courts have held successor corporations to individually owned businesses responsible for the individuals' business debts. See Nielsen v. City of Saint Paul, 88 N.W.2d 853, 863 (Minn.1958) ("The record indicates that here a sole trader, operating as the Northwest Flooring Company, together with two other persons who had become associated in making the bid incorporated, the resulting corporation taking over all equipment and assets and continuing the same business at the same place with the same name and substantially the same ownership. It cannot be said that equitably there is not a strong inference that the corporation assumed the liabilities of the sole trader, Northwest Flooring Company.... It follows therefore that the expedient of adopting a corporate business structure, having the same name, properties, and purposes as the former Northwest Flooring Company, operated by Charles W. Coleman and assisted by his father and one Lawrence W. Merten, individuals, will not be effective to purge the organizers in their corporate capacity of the obligations previously incurred in their individual capacity...."); Blumenthal v. Schneider, 203 N.W. 393, 394 (Wis.1925) ("We have a case where a sole trader incorporates and the corporation takes over all his assets, continues the same business at the same place with substantially the same name and under substantially the same ownership equitably. Under such circumstances a strong inference arises that it assumes the liabilities of the sole trader."); Acorn Lumber Co. v. Friedlander Box Co., 240 Ill.App. 425, 430-31 (1926) (" ' [C]reditors of the institution, whether the claims accrued before or after the reorganization, all stand upon precisely the same footing'.... The same rule is true whether the business was originally conducted by an individual or a corporation which individual or corporation afterwards turned over all of his or its assets to a new corporation, nothing being paid but stock in the new corporation.") (citation omitted). See generally Annotation, Liability of Corporation for Debts of Predecessor, 149 ALR 787, 798 (" [W]here a corporation is organized for the purpose of taking over the assets and business of a firm or an individual, and the business is continued in much the same way as before, this has been held sufficient to charge the corporation with the debts of its predecessor.")

Since the district court found dispositive its finding that "Pac has not proven any improper conduct on the part of Victor Clarke, individually, relating to his position as the controlling shareholder of CTI," it made no findings on the determinative issue--whether CTI is, in fact, a continuation of Clarke's individual trucking business. Therefore, we reverse that portion of the district court's opinion denying the two offsets at issue in this appeal and remand for further proceedings.

REVERSED and REMANDED.